Lennox International Q2 Earnings Call Highlights

Key Points

• Q2 revenue rose 3% to $1.5 billion, while adjusted EPS was flat at $7.72. Strong 24% growth in the commercial Building Climate Solutions segment offset a 7% decline in residential Home Comfort Solutions revenue.
• Residential demand remains pressured by weak new construction, elevated mortgage rates and consumers delaying replacements. Lennox said the recovery is progressing more slowly than expected, with meaningful benefits now anticipated in 2027.
• Lennox lowered its full-year adjusted EPS guidance to $23–$24 and reduced its residential growth outlook, while raising its commercial growth forecast to approximately 20%. The company maintained its 8% enterprise revenue-growth target and $750 million–$850 million free-cash-flow outlook.

Lennox International NYSE: LII reported second-quarter revenue growth of 3% to $1.5 billion, while total segment profit increased 2% to $355 million and adjusted earnings per share was flat at $7.72. The company said strong performance in its commercial-focused Building Climate Solutions segment helped offset continued weakness in residential markets.

Chief Executive Officer Alok Maskara said the quarter reflected the benefits of Lennox’s direct-to-dealer model, investments in digital and distribution capabilities, and actions to manage a changing operating environment. However, he said residential demand recovery has progressed more slowly than expected, leading the company to shift expectations for the most meaningful recovery benefits into 2027 rather than the second half of 2026.

Residential demand remains pressured

Home Comfort Solutions revenue declined 7% from the prior-year period, led by a 12% decline in unit volumes. Favorable pricing and mix added 3% growth, while acquisitions contributed another 2%. The volume decline nevertheless improved from the 21% drop reported in the first quarter.

Residential new-construction weakness was a major factor, with revenue in that market down about 30% during the quarter. One-step channel volumes declined by the mid-teens, while two-step volumes were relatively flat year over year.

Maskara said much of the one-step decline was tied to residential new-construction business that Lennox chose to leave because margins were too low. He said the company’s exit from that business occurred faster than expected amid competitive pricing, but added that Lennox is nearly complete with its effort to move away from lower-margin accounts.

“We don’t want to do that again,” Maskara said, referring to shipping units at negative margins. “We feel good about where we are to protect our margins and make smart business choices.”

The company said replacement-market share has increased modestly over the past 12 months, even as it has lost significant share in new construction. Maskara cited elevated mortgage rates, inflation, low consumer confidence and subdued housing construction as constraints on residential demand. He said Lennox believes replacement demand has been deferred rather than eliminated, as consumers choose repair over replacement.

Home Comfort Solutions segment profit fell $30 million. Lower sales volume represented roughly $50 million of EBIT headwinds, including about $10 million of factory absorption pressure as the company adjusted production and inventories to match market conditions. The segment also received approximately $25 million of tariff refunds during the quarter, earlier than initially expected.

Commercial segment posts strong growth

Building Climate Solutions revenue rose 24%, including 12% organic growth. Acquisitions, primarily Duro Dyne, added 9% growth, while favorable mix and pricing contributed 3%.

Management attributed the performance to national-account wins, increased emergency replacement activity and growth in the service business. Maskara said additional manufacturing capacity has helped Lennox improve its emergency replacement offering and regain national accounts. He characterized a substantial portion of the segment’s improvement as share gains, alongside signs that commercial end markets are no longer declining.

Building Climate Solutions segment profit increased on higher volumes and favorable mix and pricing. Duro Dyne contributed approximately $11 million of M&A accretion, partly offset by investments in customer-facing digital capabilities and innovation. The business also received approximately $5 million in tariff refunds.

Maskara said Lennox’s services, refrigeration and rooftop businesses all performed well during the quarter. He added that emergency replacement margins are in line with the company’s large national-account business, with further opportunity for improvement through distribution execution.

Guidance revised as residential outlook weakens

Lennox reduced its full-year adjusted EPS outlook to a range of $23 to $24, while maintaining its expectation for approximately 8% enterprise revenue growth and free cash flow of $750 million to $850 million.

• Home Comfort Solutions revenue growth is now expected to be approximately 1%, down from prior guidance of 4%.
• Building Climate Solutions revenue growth is now projected at approximately 20%, up from 16% previously.
• The company now expects Home Comfort Solutions volumes to decline by high single digits for the full year.
• Expected productivity was reduced to approximately $60 million from $75 million, reflecting lower residential production and delayed material cost-reduction initiatives.
• Capital expenditures are now expected to be about $225 million, down from $250 million, due to project timing.

Chief Financial Officer Michael Quenzer said the EPS reduction primarily reflects lower residential volume expectations, which more than offset stronger commercial demand. The company expects second-half Home Comfort Solutions margins to improve relative to the first half as volume comparisons improve and July pricing actions take effect, though management indicated margins could be flat to slightly down year over year because of acquisition dilution and price-cost dynamics.

Quenzer said the company recognized all tariff refunds it expects to receive during the second quarter. Lennox continues to forecast 5% inflation for the year, as benefits from adjustments to Section 232 tariffs are expected to be offset by inflation in commodities, fuel and memory.

Cash flow, acquisitions and capital deployment

Lennox generated $172 million in operating cash flow during the second quarter and reported trailing 12-month free cash flow conversion of 92%. Inventory dollars were flat compared with December because of inflation and tariff-related costs, but unit inventory continued to decline. The company said it remains on track to meet the inventory-reduction assumptions embedded in its free-cash-flow outlook.

Net debt to adjusted EBITDA was 1.3 times at quarter-end. Lennox repurchased approximately $130 million of shares in the second quarter and, after quarter-end, completed the acquisition of the Comfort-Aire, Century and Coast Air brands using approximately $200 million of debt.

Maskara said the acquisition expands Lennox’s reach in small and midsize distributor channels and broadens its HVACR equipment, accessories and parts offerings. The company expects the acquisition to be accretive to earnings per share in 2027 and sees opportunities for product integration, logistics savings and SG&A efficiencies.

About Lennox International (NYSE:LII)

Lennox International Inc is a global manufacturer of climate control products and services, principally serving residential and commercial heating, ventilation and air conditioning (HVAC) markets. The company designs, engineers and produces a range of products including furnaces, air conditioners, heat pumps, air handlers, packaged rooftop units and related controls and indoor air quality equipment. Lennox also supplies aftermarket parts and accessories and supports its product lines with technical service, training and warranty programs for dealer and distribution partners.

Originally founded in 1895 by Dave Lennox, the company has grown from its early roots into a multinational business with operations concentrated in North America and a presence in other international markets.

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